Gold Entering A Dangerous Technical Area

The gold price has moved quickly and it has developed an important new uptrend characteristic. This so-called 'parabolic' trend is a dangerous type with a high probability of a sudden collapse.

The original breakout above the psychological resistance level near $1,000 was a breakout from a trading band. Using the trading band the first price target projection was near $1,080. This was achieved quickly. The same trading and projection method is used to set the next higher target. This target is near $1,160. This target has a high probability it will be achieved.

The breakout above $1,000 started with the characteristics of a rally. The rally has been fulled by a number of reasons: large buying activity of central banks in particular India's Central bank, the decline in the U.S. Dollar, and the anticipation of continued low interest rates in the U.S. among them.

A strong rally breakout typically develops into a sustainable and reliable trend, characterized by retreat and rebound activity within the new up trend development. However, over the past two weeks, the nature of the rally breakout has changed drammatically. It is no longer a normal uptrend, but best described as a parabolic trend.

The parabolic trend is a curved trend line that captures the acceleration of price. The trend will eventually develop into a vertical line, which is used to define the end of the rising trend.

The characteristic of the parabolic trend is that the trend collapses very rapidly when price moves to the right of the trend line.

The parabolic trend line is divided into three sections:

1. In the first section the parabolic trend is difficult to recognize.
   
   
2. In the second section of the parabolic trend the exit signal is a close below the value of the trend line. The second section of this parabolic trend is currently developing.
   
   
3. The third section of the parabolic trend is more dangerous. Here the exit signal is a move below the value of the parabolic trend line. Additionally, there is always a time when the price has no choice. Price will automatically move to the right of the trend line and signal the end of the trend.

When this develops, the trend collapses very quickly. The plunge in the oil in 2008 after prices reached $140 was characteristic of this parabolic trend collapse. This is the risk with the gold trend. When the parabolic trend ends the gold price can move quickly towards support at $1,000.

Generally the leverage impact with gold producers and explorers is about 3 to 1. This is an advantage when the gold price goes up. When the price falls this leverage works in the opposite direction and causes a substantial and rapid decline in the price of gold producers and explorers.

Winter Series: Real Estate As A Hedge To Inflation

Real Estate As A Hedge for Inflation

Given the current buyers market, some investors may find property more attractive, never mind more rewarding, than stocks; and for those convinced that the federal government's borrowing-spending binge will bring a nasty bout of inflation down the road, real estate is the hedge for you. As inflation occurs, the value of your property will go up. Then there is the financing: an investors can borrow dollars today when they are cheap and pay them back when they are worth less (inflation reduces the value of the dollar). That and a sea of foreclosed properties make your dollar go a very long way.

But depending on how you get into real estate, it can be a time consuming, complex and (as the recent bust proves) risky proposition. There are many ways to invest—in properties or funds; in commercial, residential or industrial; in single-family homes or condos. Each strategy has advantages and disadvantages, but experts say there are a few principles that hold true across the board.

• Do your homework. Do not feel obligated to do the deal if you do not have all the information that you need. That means examining market dynamics for the segment you are considering, knowing how financing works, and understanding all the aspects of the deal.
• Be skeptical of deals that seem too good to be true.
• Expect things to go wrong. What if you had a vacancy and needed a new roof and a water heater, all in 30 days? If you see, anticipate, and plan for all the things that could go wrong, you will usually end up being okay.

With those principles in mind, you need to figure out how you want to invest. That choice will depend on your personal and financial goals and predilections.

Investment Vehicles: REITs and ETFs

Use real estate investment trusts (REITs) and exchange-traded funds (ETFs) to diversify into real estate. The vehicles are fast and easy ways to get into different properties, geographical areas and real estate classes. With publicly traded securities you can remain liquid. If you cannot tolerate the risk, you are not forced to go and sell a physical piece of real estate, which could take months.

It is also relatively simple to limit risk by using a trailing stop loss order, which automatically sells an asset if it drops below a certain predetermined price. If the real estate investments go up for an extended period of time, it is also possible to lock in years of gains quickly.

With REITs and ETFs, you don’t have any of the hassles or liabilities that come with being a landlord or a property owner. But some investors are looking to be more hands-on. And, you may be missing out on some money. Admittedly, the returns that you would get on a physical piece of real estate would exceed what you would get on a publicly traded security.

Residential: Single Family

For many, the next step up is investing directly in a property. Residential is by far the easiest and lowest risk. You do not have to have a few million bucks to get involved, and you can get a 20-year fixed-rate loan at a really low rate, putting down 20 or 25%.

The simplest approach is to buy a house or apartment unit to rent, especially since most of us are familiar with home ownership. If you are starting in single family, buy in the neighborhood you are working in. You will know about the area. You will be able to get there easily. When looking for properties, consider how the home fits into the neighborhood and the current housing market. If a property is dirt cheap, ask yourself why.

Do not just look at price though. Make sure the product matches the market. Many real estate investors advise making sure you are in the middle tier of the neighborhood in terms of size and price. Keep in mind that single-family homes require hands-on management, and so are difficult to run from afar. Also, make sure you are okay with being a landlord. Another potential downside: cash flow is all or nothing. If you lose your tenant, it drops to zero.

Residential: Multifamily

On the other hand, if you have 20 tenants and one moves out, you still have 19 others paying the rent. Other pluses of investing in this category: your rentals are all in one location, so there is one lawn to mow and one roof to repair; if the property is large enough—over 80 or so units—you can hire a professional manager. This removes you from being in the landlording business—you are only in the property ownership business.

On the downside, multifamily properties are often more expensive than single family homes, and the financing is different. Loans are based on debt service ratios—an assessment of the cash flow rather than an appraisal of the resale value. There are more financing options for loans over $1 million. Local bank loans will typically be portfolio loans, and be 10- to 15-year fixed rate loans, which means high payments, or 20-year loans with balloon payments.

Commercial

Rents are generally higher with commercial properties than with residential properties. However, much like multi-family residential units, lending for commercial properties is based on the income the properties produce. Generally the income the property produces needs to be 1.25X the debt service. Financing can be difficult to obtain these days, but private investor groups are a common option.

When seeking out potential properties, research local market dynamics—the commercial real estate saw is: Retail follows rooftops. Strip shopping centers can be a lucrative source of commercial investment gains. Though retailers are not doing well currently, grocery stores, discount stories and drugstores are. Look for a local strip venture that you are familiar with and has local businesses that people use and need. Be aware though that they need to be renovated every five to ten years.

No matter what you are considering, do not be afraid to walk—for any reason. True for any investment option, the best real estate investment decisions are usually the properties that you turn away. There will always be other great deals.

Obama Approval Ratings Tied to the Economy

What we have is a comparison of Barack Obama's approval ratings on the economy to his approval ratings overall. It includes all polls in the Pollster.com database that asked about both approval of Obama on the economy and his overall job performance -- a total of 109 polls dating back to the start of his term. Some LOESS curves have been drawn in to illustrate the trend.

Although Obama's approval has declined in both departments (particularly during period between about April 1 and August 1; it may not be declining any further now), the magnitude of the gap has been exceptionally steady over time.

From the very start of Obama's term, there has been about a 5-6 point gap between approval of his performance on the economy and his performance overall, with the latter figure consistently being somewhat higher.

The economy, outside of what we discuss on this blog, is sort of boring to talk about: it is a slow-moving sort of thing, and one over which the President has only a certain amount of control. Let us now discuss a third variable, which is Obama's approval on health care.

For the most part, the health care numbers are following the same trend, although you can perceive a bit of a secular drop during August, the Month of a Million Town Halls (followed by partial recovery in September, after Obama's address to a joint session of Congress). Although this is not easily provable -- and certainly not proven by this data -- it is suspected that much of the anxiety over health care reform also stems from anxiety about the economy, in ways that are both general and specific.

Indeed, the most troubling problem for the Democrats may be that government interventions into the economy -- meaning the bailout and the stimulus -- are increasingly perceived as having failed, which in turn increases skepticism about government intervention overall, in health care and other areas. Perhaps when the jobs picture recovers, so too will perception of these other programs, which will rob Republicans of much of their ammunition (although since employment is unlikely to recover significantly before 2010, they will have plenty of fun in the shooting gallery in the meantime). But perhaps instead, the damage will be medium or even long-term: if the economy takes too long to recover, it may be perceived as being in spite of, not because of, programs like the stimulus. If that's the case, the 2010's could be a lost decade for liberalism.

It is a political imperative for the Democrats of the highest order to get some sort of jobs bill to Obama's desk -- the sooner and the bigger the better. Suppose you could create jobs at a price of about $40,000 per, which is higher than the figure suggested by empirical research on highly targeted jobs programs. A $200 billion bill would then create 5 million new jobs, which would reduce unemployment by about 3.3% points (e.g. from 10.2% to 6.9%).

It is not that easy. But the Republicans -- who have been clamoring for such a bill for months -- are liable to find themselves on the wrong side of the politics of the issue. And even if the jobs bill is not especially efficient at reducing unemployment on its own, it would have a bit of a wind at its back between the existing stimulus efforts and the organic recovery in the economy.

Might it even be worth tabling health care to get the jobs bill passed? Probably not when health care is so close to the finish line, and when the House can start working on a jobs program while the Senate deliberates health care. But if it looks like health care does not have the votes, this would be the exit strategy for the Dems -- for Obama to intervene and say: "we need a jobs bill first." Either way, a couple million more jobs would make everything much smoother for the Democrats; the economy remains the primary way that the public evaluates their success.

U.S. Shoppers Spent Less Over Black Friday

The National Federation of Retailers (NRF) says 195 million people shopped at stores and online over the weekend, up 13.3% from last year. Total spending was flat at $41.2 billion, but on average consumers spent 8.5% less, roughly $343 per person compared to $372 a year ago.

American consumers shopped more for bargains at the start of the U.S. holiday season and spent significantly less than a year ago, according to early data released on Sunday.

Data released by ShopperTrak on Saturday showed that sales rose a scant 0.5% on Black Friday, which is often the single busiest day of the holiday shopping season. The NRF has forecast a 1% decline in holiday sales this year, which would mark an unprecedented drop for two straight years after a global financial crisis erupted in 2008. Retailers had warned investors they would take a conservative view of holiday sales and have cut inventory and reduced expenses to compensate.

Target (TGT) said earlier this month that sell-side analysts were "somewhat more optimistic across most of our industry than we believe is warranted" regarding the potential for a consumer rebound in time for the holidays. Shoppers interviewed across the country by Reuters over the weekend said they were lured by bargains, but would stick to their budgets and avoid purchases if they could not find a good deal.

The NRF said shoppers' destination of choice appeared to be department stores, with nearly half of holiday shoppers visiting at least one.

Discount stores came in second garnering a 43.2% share, and outlets picking up 7.8% of shoppers. Just over one in four surveys shopped at electronics stores (29%) or online (28.5 %). Discount chains like Wal-Mart Stores (WMT), department stores and higher-end chains like Saks (SKS) seemed to have lured more spending and avoided steep discounts, retail consultants and executives said on Sunday. Specialty apparel chains, however, may face another tough year as they relied on heavy promotions to draw shoppers.

Retail analyst Edelman expects holiday sales to be flat this year, but he said he expected profits for most retailers to be higher.

What They Bought

Just over half shoppers bought clothing, according to the survey, helping to boost department store sales. About 40% bought books, DVDs and video games. Those numbers were about the same as last year.

Price wars on popular toys at Wal-Mart, Target and Toys R Us saw more shoppers buying toys as gifts. About a third of shoppers said they spent money on toys, a 12.9% increase from last year. According to the survey, more shoppers bought sporting and leisure items this year — 12.6%, up a point from last year. Personal care and beauty items saw a bigger increase — 22.4% up from 19.0% — along with gift cards — 21.2% vs. 18.7% a year ago.

Did those early door busters in the wee hours of the morning pay off? Nearly one-third of shoppers (31.2%) were at the stores by 5 a.m. according to the NRF survey, that was up from 23.3% last year. The majority of those early shoppers were men or younger shoppers.

Online Sales Lagging

Only 28.8% of those surveyed by NRF say they shopped online over the weekend, compared to 34% last year. Those surveyed may be waiting for bargains on so-called Cyber Monday.

Yet, research firm comScore, which measures internet commerce, says online sales on Black Friday saw a big jump, with sales totaling $595 million, up 11% from the day after Thanksgiving last year.

According to the NRF's Shop.org survey 96.5 million Americans plan to shop on Cyber Monday this year, up from 85 million in 2008. More than 90% of those shoppers say they will shop from home Monday, compared with 13% online.

As with Black Friday, they should find plenty of sales. Nearly 9 in 10 of retailers surveyed say they plan to offer Cyber Monday specials.

Winter Series: Rebalancing Your Technology Portfolio

Rebalancing Your Technology Portfolio

There is a transition occurring in the tech sector. The traditional sector bellwethers—computer hardware, desktop software, consumer electronics—are no longer the areas of growth. It is all about the enterprise. We already know that the consumer market has been good within tech. Enterprise spending is just now starting to get better.

Despite the tech sector’s strong performance in 2009, IT spending has been weak. Gartner recently reported that 2009 will be the worst year on record for IT spending, with enterprise spending on a pace to drop 6.9% from 2008.

With the economy improving, however, businesses will be more inclined to ramp up purchases and upgrades, which they put off during the recession. That is particularly true among networking and communications companies. While companies were slashing IT budgets, businesses are relying more and more on Internet-based and wireless data networks; eventually, those companies will have to beef up their network infrastructures. Additionally, with the increased focus by the Obama administration on improving the efficiency of the health care system (not to mention the loads of money thrown out there for electronic medical record reform), investors can expect major IT spending from hospitals and health insurers.

Microchip and Data Center Stocks to Benefit

While the PC trade seems to be getting long in the tooth, the recovery in IT spending bodes well for enterprise chip firms and comm/networking firms. China is already planning a very large spending ramp associated with its cellular infrastructure build out, so some of those comm/networking names play into those trends.

Companies that stand to benefit from an increase in enterprise spending should include Silicon Labs (SLAB), Broadcom (BRCM) and LSI (LSI). Additionally, a recent underperformer, Qualcomm, who collects royalties on 3G devices, could outperform within chips next year just based on the amount of underperforming seen in 2009.

Companies that provide data center products, particularly storage, also stand to gain from an upswing in IT spending. Storage companies like EMC (EMC) and NetApp (NTAP) have been doing well and will continue because of the increasing volume of data stored every day.

Shift from Hardware to Software

Adjusting your tech portfolio to accommodate the changes in the tech landscape means limiting your downside exposure. Enterprise software and services favor this due to the recurring revenue stream they provide. Software is now sold to corporations, more or less, on a subscription basis, which makes for very smooth revenues. Companies like Computer Associates (CA), BMC (BMC), and of course IBM (IBM) are three companies that have pretty smooth revenue streams. Investors should also look at business services providers like Accenture (ACN) that deal only with the enterprise.

Analysts caution investors away from the PC sector, despite the release of Windows 7. But enterprises, which typically operate on a three-year refresh cycle for PCs, have been putting off upgrades. That was due both to the recession and the unpopularity of Windows Vista. With so many large companies still running older Windows XP systems, there could be an uptick in PC sales late in 2010. In the meantime, PC-related firms such as Dell (DELL), Hewlett-Packard (HPQ), and Intel (INTC) may find themselves with excess inventory.

The More Things Change, The More They Stay The Same

Although the names leading the charge may change, the fundamentals of tech investing remain the same. Investors should stick with market-leading companies that serve a broad range of industries in several geographic regions. Make sure you do your homework regarding a company’s financial performance. Even in a recession, you would want to see this year’s revenues a little bit higher or at least flat with last year’s revenues.

The tech sector has been a bright spot for much of the year, and analysts believe the sector still has momentum going into 2010. For investors, it is a matter of keeping up with the new growth areas. Some people are worried that tech has already had such a huge move that where is the opportunity from here. It is unlikely that leadership will change from now until the end of the year. If you look at IT spending, tech company earnings, improving demand, improving revenue and earnings, and just from a near-term momentum standpoint, that is not going to change.

Berkshire Hathaway Shareholders: Do You Know What You Own?

As CEO and primary shareholder of Berkshire Hathaway (BRK), Warren Buffett, the world's most famous investor, has developed a well-known reputation of buying big stakes in companies he believes in. When Buffett buys shares of a company for BRK, the markets translate his moves as a vote of confidence for a firm's continued success. Although Berkshire Hathaway's holdings change, the company's most recent SEC filings (June 2009) reveal where the Oracle of Omaha is most heavily invested. Here are the 14 publicly traded stocks, by value, that are the biggest holdings of Berkshire Hathaway (smallest to largest):

1. Nike (NKE) - $478.55M (1.57% ownership)
2. Union Pacific Corp (UNP) - $567.84M (1.9% ownership)
3. Washington Post (WPO) - $738.15M (18.38% ownership)
4. Moody's (MCO) - $876.68M (16.11% ownership)
5. Walmart (WMT) - $994.82M (0.51% ownership)
6. U.S. Bancorp (USB) - $1.62B (3.61% ownership)
7. Wesco Financial (WSC) - $1.86B (80.1% ownership)
8. Johnson & Johnson (JNJ) - $2.17B (1.34% ownership)
9. ConocoPhillips (COP) - $3.27B (4.35% ownership)
10. Kraft Foods (KFT) - $3.80B (9.37% ownership)
11. American Express (AXP) - $5.46B (12.75% ownership)
12. Procter & Gamble (PG) - $5.64B (3.3% ownership)
13. Wells Fargo (WFC) - $8.39B (6.48% ownership)
14. Coca Cola (KO) - $10.63B (8.63% ownership)

Why Is The U.S. Holding Onto Its Gold?

The Treasury Department has 261.5 million ounces of gold in its reserves, representing about a third of the gold stockpiles held by governments around the world. With gold selling at about $1,100 an ounce, that means Uncle Sam is sitting on $288 billion worth of the shiny stuff.

The U.S. government holds the world's largest gold reserve, but even with gold prices at a record high, the Treasury is unlikely to sell.

The Treasury's gold sits in vaults across the country. It holds about 25,000 bars in a vault five floors down, 80 feet below street level, in the New York Federal Reserve in Manhattan. The majority of the nation's gold reserves still reside in Ft. Knox in Kentucky.

The U.S. is not the only nation holding gold. In fact, as the dollar continues its downward spiral, many countries are even buying up gold. Last week, the International Monetary Fund offered up 400 metric tons of gold, and the Reserve Bank of India bought 220 metric tons of it. Sri Lanka bought 5.3 metric tons in the auction as well. In the second quarter, central banks were net buyers of gold for the first time since 1997.

Gold has come in and out of fashion with investors over the years. In times of economic instability or inflation, gold demand and prices have trended higher. Despite wild price fluctuations over the years, gold has maintained its purchasing power for about the past 750 years. From the mid-14th century until now, you can draw a relative straight line in the purchasing power of gold. Gold is universally recognized as a store of value; it denotes price stability.

Gold had been the standard currency for international trade for centuries. In fact, the Federal Reserve vault in New York has compartments for different countries. When one country would trade with another, a "sitter" would simply move bars from one compartment to another.

Gold's inherent value is buoying its resurgence in popularity. The comeback also raises important questions about the United States' own reserve position and the government's ability to maintain demand for U.S. Treasury bonds as the world catches the gold bug.

So Why Are We Sitting On It

Governments' dependence on gold has waned over the years, but they still hold 848 million ounces of it, down 29% from the 1965 peak of 1.2 billion ounces, and just 10% from the 942 million ounces they held 50 years ago, according to the World Gold Council. Curiously, the Treasury still values its gold at $42.22 per ounce. Congress reached that figure in 1973, two years after the the post-World War II Bretton Woods gold standard, which had valued gold at $35 an ounce, was scrapped.

With gold selling at prices 26X that amount, why will the Treasury, and by extension, the Fed, not realize those gains on their balance sheets by displaying the market value of their holdings? Or, with the gold standard abandoned, why doesn't the government sell off its reserves to put that money into the economy or pay off debt?

There are lots of reasons, ranging from the psychological to the practical:

• If the U.S. started selling gold from our official reserves, it would be recognized as a sign of weakness for the dollar. America's relatively large gold holdings provide some psychological benefit to our currency.
  
  
• Many gold experts and economists agreed that even though the gold standard has been abandoned for nearly 40 years, the world is still cleaving to its gold because it is a tangible asset.
  
  
• Another reason for Treasury to hold tight is gold's fluctuating price. British Prime Minister Gordon Brown is a great example of this observation. When Brown was the U.K. Chief Finance Minister a decade ago, he decided that gold had become relatively useless to the government. Brown sold off 400 tons (60% of the United Kingdom's gold) between 1999 and 2002. Brown's problem: Gold was selling at a record low inflation-adjusted average of $275 an ounce at the time. It turned out, had he waited 10 years, the U.K. would have made four times what it hauled in from the sale.
  
  
• Furthermore, a sale of all the country's gold wouldn't make much of an impact. With the nation's annual deficit at $1.7 trillion, a $787 billion stimulus package and a $700 billion bank bailout, $300 billion is kind of puny in comparison.
  
  
• A sale of the government's gold would be especially poorly timed now, since foreign central banks are lining up to add gold to their reserves. A mass-sale of gold would mostly end up in other nation's coffers, reducing their demand for U.S. Treasury securities.

The resurgence of gold buying should be unsettling for the government. The trend indicates that some foreign countries would rather hold onto an inert metal than Treasury bills that pay interest. Treasurys have long been viewed as a riskless asset, because they are tied to the dollar and are backed by the U.S. government. If the trend continues, that could reduce the demand for Treasury securities and bonds' book value would go down.